That post of yours with Andrew's observations intact, is very timely. I would though like to offer a variation to the theme and illustrate this by way of example.
Overnight, 2 significant events happened overseas, one concerning Microsoft and the other concerning Ericsson.
In Microsoft's case, they announced the introduction of quarterly dividends (previously annual), doubled the dividend rate to 16c (previously 8c), introduced a 4-year share buyback scheme, and announced a special US$3 dividend.
By all accounts, this should have powered the market and motored the stock along. In fact, muchf the opposite occurred with the Microsft news underwhelming the market and Microsoft itself.
Why?
Many analysts soon found fault with the Microsoft announcement, just as they did with virtually every other announcement overnight.
In Microsoft's case, Charles Di Bona of Sanford Bernstein was quoted as saying "they could have gone a little further to get themselves more in line with the market yield". In the process of making this observation, however, Di Bona seemingly ignored the impact of the US$3 special dividend (approximately 11% by value and upwards of 20% on a tax adjusted basis).
Di Bona also criticised the the lead-time to the payments being made. However, on this score, the payment is to be made shortly following the dividend tax cuts which will soon halve the rate of dividend tax from 35% to 15%.
On the stock buyback, Di Bona criticised the fact that it was being spread over 4 years preferring to have seen more up front rather than spread out.
In Ericsson's case, they came out with Q2 (or 1H) results that blew apart all consensus (or even robust) forecasts.
In most categories of assessment, consensus was bettered by a margin of 20% or more, in the case of sales, revenue (etc), or by a new 50% factor, in the case of profit (ie: where consensus was for 5.3BSEK NPBT, and the resulting NPBT was 7.8BSEK).
Even in the all important area of gross margin, consensus had Ericsson's gross margin rising from 44.7 to 44.8%. Instead, it came in at 47.8%.
Notwithstanding this, Nomura Securities (who missed the market by a very wide margin) said that this had already been factored into the price.
What do these 2 events suggest?
Several things, quite possibly: 1) Analysts were made to shoulder the blame of "dot.com". Now they are returning the favour. Sarbanes-Oxley, the new IFSR rules (and IAS for financial reporting) reflected some of the control mechanisms designed to haul in the comments of companies and analysts alike. Analysts were also required to certify their independence (etc). 2) Rather than being independent, analysts are now taking on more of the characteristics of a theatre critic - Finding almost nothing to like in what they see even though even more often now than not, they are getting their own individual assessments wrong. 3) Dot.com taught us to criticise and blame those who led us all in the pursuit of irrational exuberance. Optimistic forecasts (whether by companies or by analysts) were all singled out and criticised formally as well as generally. What 2004 is now showing us is that an analyst /corporate can never be criticised for under-stating the cause. Better, then to be on the lower side of expectations than on the upper side. 4) Sarbanes-Oxley amongst other regulatory endorsements have made many people out there "gun shy". That's why future forecasts have been increasingly moderated, or under-whelming in effect (possibly even under-developed). Far better then to coxntinually surprise to the upside or to moderation, than to get caught in the down draft. 5) The position for many out there now is to be conservative or cautious in their outlook, as opposed to being robust. So, for example, in the case of Ericsson, market guidance was cautious in the forward outlook, even though the sales growth and order intake is now growing at the fastest rate it has since 2000.
This "new" conservatism by management which arguably understates the actual outlook by a comfortable margin is then further discounted by the analysts when they arrive at doing their own research assessments.
In consequence of this, the Company (and there are many other examples of this out there) is seen to be improving its fortunes on a very cautious (as opposed to robust) basis. As a result, consensus forecasts are increasingly being bettered by considerable margins by a number of companies out there.
By way of example, if the actual forward outlook reflects growth of 100, management is likely to reflect this as 60-80, and the analysts are then likely to further reflect this as 40-70.
In the end, improving companies will continue to be caught in the wider downdraft, not because of anything inherently wrong with the fundamentals, but because of something fundamentally wrong in the human dimension.
Call it what you like, but to my way of thinking, the crisis of confidence that previously afflicted management has now spread further afield and is fast becoming the new crisis of cautiousness.
To my way of thinking, this reflects the new Factor X that will soon start dominating our investment skyline - breaking the new trend to cautiousness and conservatism, and understating the probabilities by factoring in too many reserve propositions (ie: adopting too cautious an outlook which manifests itself, when measured to reality, as being "too scared to take a stand for fear of being caught out again and criticised"). Perhaps that's why JP Morgan has issued 3 downgrades in the last 10 days in relation to NAB alone.
More than ever before, individual analysis and one's own research is going to become more important than ever before. Just when you thought that all the hen's teeth had been picked out of Annual Reports (etc), think again. The new cycle will be dominated by individual investors doing their own research (fundamental, technical, empirical, strategic and sociologically, as well) because guidance (of the type that matters) is now less likely to be offered.
